On December 4, 2001, the Securities and Exchange Commission (the "SEC") issued SEC Release No. 33-8039 (the "Release"). The Release serves as a "warning" to public companies that issue earnings releases containing financial information prepared other than in accordance with United States Generally Accepted Accounting Principles ("GAAP"), commonly referred to as "pro forma" financial information1. In addition, the SEC reaffirmed its informal guidance on how to correctly present "pro forma" financial information in earnings releases.
The SEC recognized that there is no prohibition preventing public companies from publishing interpretations of their results or publishing summaries of GAAP financial statements. The Release also makes clear that "pro forma" financial information, with the appropriate disclosures about their composition and limitations, can be quite useful to investors. The focus of the SEC's concern is when "pro forma" financial information obscures GAAP results in earnings releases or otherwise misleads investors.
As many companies prepare to release their 2001 earnings and results of operations beginning in late January, the SEC reminded issuers and investors of the following principles:
It is interesting to note that the Release does not provide any "new" guidance on how to prepare and present "pro forma" financial information in earnings releases. For years, the SEC staff has been reminding issuers of the need to balance "pro forma" financial information with its GAAP results. Though many companies have been making a visible effort to conform their "pro forma" earnings releases to most or all of the SEC's guidelines, the Release should still serve as a "warning" to all issuers that in the months ahead, the SEC's enforcement staff is likely to increase its scrutiny of earnings releases and seek penalties against issuers who publish misleading "pro forma" financial information.
1: The phrase "pro forma" financial information as used in the context of earnings releases has no specific defined meaning and should not be confused with the "pro forma" financial information for mergers and other transactions required by the SEC's rules, such as Article 11 of Regulation S-X.